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Principles of Good Tax Policy. Annette Nellen San José State University. Presentation Overview. Purpose of the statement Overview to the 10 principles Examples of application of the 10 principles. Tax Policy Concept Statement #1.

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principles of good tax policy

Principles of Good Tax Policy

Annette NellenSan José State University

presentation overview
Presentation Overview
  • Purpose of the statement
  • Overview to the 10 principles
  • Examples of application of the 10 principles
tax policy concept statement 1
Tax Policy Concept Statement #1

Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals

  • product of the policy, legislation & simplification committee
  • created as preliminary step to analyzing tax reform proposals
  • but - also useful for analyzing any tax proposal - any size, any degree, any level
  • basically - Adam Smith’s tenets + 6 more
purpose of the framework
Purpose of the Framework
  • To answer the question:

How should proposals to change existing tax rules be analyzed?

  • To be short and to the point.
  • To be a prelude to series of add’l tax policy papers.
equity fairness
Similarly situated taxpayers should be taxed similarly.

Horizontal and vertical equity.

“Fairness” (or really, the perception of fairness).

Should really look at entire range of taxes a taxpayer is subject to.

Equity & Fairness
certainty
Tax rules should specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined.

Certainty, rather than ambiguity.

Ability to determine tax base and rate.

Basically, the level of confidence that exists that the tax is being calculated correctly.

Certainty
convenience of payment
Convenience of Payment

A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer.

  • Helps ensure compliance.
  • Appropriate payment mechanism depends on amount of liability and ease of collection.
economy of collection
Economy of Collection

The costs to collect a tax should be kept to a minimum for both the government and taxpayers.

  • How many revenue officers are needed?
  • Closely related to simplicity principle.
simplicity
Simplicity

The tax law should be simple so that taxpayers can understand the rules and comply with them correctly and in a cost-efficient manner.

  • Reduces the amount of errors.
  • Increases respect for the system.
  • Enables taxpayers to understand tax consequences of their transactions.
neutrality
Neutrality

The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum.

  • Taxpayers should not be unduly encouraged or discouraged from engaging in certain activities due to tax law.
  • Primary purpose of tax system is to raise revenue, not change behavior.
economic growth efficiency
Economic Growth & Efficiency

The tax system should not impede or reduce the productive capacity of the economy.

  • Tax system should be aligned with the economic goals of the jurisdiction imposing the tax.
    • For example, should be aligned with jurisdiction’s economic goals for economic growth, capital formation and int’l competitiveness.
    • Should not favor one industry or type of investment at the expense of others.
transparency visibility
Transparency & Visibility

Taxpayers should know that a tax exists and how and when it is imposed upon them and others.

  • Enables taxpayers to know the true cost of transactions.
  • Enables taxpayers to know when tax is being assessed or paid and to whom.
minimum tax gap
Minimum Tax Gap

A tax should be structured to minimize noncompliance.

  • Tax gap = amount owed less amount collected.
  • Procedural rules needed to attain compliance.
  • Generally, is a need to strike a balance between (a) desired level of compliance and (b) costs of enforcement and the level of intrusiveness of the tax system.
appropriate government revenues
Appropriate Government Revenues

The tax system should enable the government to determine how much tax revenue will likely be collected and when.

  • Need to have some level of predictability and reliability to enable governments to know how much will be collected and when.
  • Generally, government realizes better stability with a mix of taxes.
challenges
Challenges
  • Desire to use the tax law for more than raising revenue.
  • Frequent changes to the tax laws.
  • Not all ten principles can be achieved to same degree for all proposed changes - need to strike a balance though.
example armey flat tax
Mostly meets:

Certainty

Convenience of payment

Economy of collection

Simplicity

Minimum tax gap

Needs work:

Equity & fairness

Neutrality

Economic growth and efficiency

Transparency

Appropriate government revenues

Example: Armey Flat Tax
example charitable deduction for non itemizers
No problem with:

Convenience of payment

Transparency

Appropriate government revenues

Problem areas:

Equity (how are taxable income and ability to pay to be measured?)

Certainty (more recordkeeping)

Simplicity (not as simple as just taking the standard deduction)

Neutrality (tax law would encourage donations)

Minimum tax gap (many might believe they should claim something)

Example: Charitable deduction for non-itemizers
example sut and e commerce
Example: SUT and E-commerce

Equity:

  • Internet vendors and Main Street really are not similarly situated, so should compliance rules apply similarly?
  • Possible solutions:
    • require Main Street retailer to charge SUT based on where customer lives
    • use origin approach
    • compensate vendors
    • third party collector funded by government
    • use a different form of consumption tax which consumer computes
example sut and e commerce19
Example: SUT and E-commerce

Certainty, Economy in Collection, Simplicity

  • 6000+ taxing jurisdictions creates uncertainty & complexity
  • Possible solutions:
    • uniform rules among jurisdictions; streamlined system
    • third party collection
    • better use of technology
    • federal level tax as a replacement (a VAT?)
example sut and e commerce20
Example: SUT and E-commerce

Neutrality, Minimum Tax Gap, Appropriate Government Revenues

  • if SUT not charged by seller and state doesn’t enforce use tax, neutrality is not achieved
  • Possible solutions:
    • educate consumers about use tax
    • simplify and unify rules
    • improved use of technology
    • replace SUT with an easier consumption tax